Why is Saving for Overhaul Difficult?
On its face, saving for your next overhaul does not seem like a complex task that requires a large amount of thought. Conventional wisdom that we learn when buying our aircraft is to know our TBO, know how much our overhaul costs, and divide the overhaul cost by the hours remaining to TBO. That is the hourly rate you need to save to ensure you have enough money for your next overhaul.
Of course, things are not so easy once you start to dig into the practical implementation that need to be considered when saving for your next overhaul. This article breaks down some of the important considerations that you need to account for when saving for your next overhaul.
Pricing Your Next Overhaul
When it comes to getting a price for your next overhaul, most owners just call a few shops to get a price estimate. Overhaul facilities now offer owners the ability to get a quote online, without talking with a single soul. And, although this is a good starting point for owners, this is only the first step in the process of actually determining what your next overhaul will actually cost. Additional factors you need to consider include:
1. Inflation - You have the price for what it would cost to overhaul your engine today. But, you're not overhauling your engine today. Many owners see an overhaul as something on the 5-15 year horizon. Because of this, you cannot ignore inflation. Each year it can either erode, or bolster, your economic buying power. Gemco has its own models of inflation that it derives on a continual basis. We look at factors including general financial market movement, Federal Reserve policy decisions, as well as geo-political factors that can drive inflation in either direction. For an engine that costs $45,000, and is expected to be overhauled in 8 years, not accounting for inflation can leave you over $12,000 short at the time of overhaul. Ouch.
2. Rotable Pool Supply Price Changes - Ask any overhaul facility, and they'll agree with the fact that the size of the rotable pool is shrinking. This means the number of exchange parts available is shrinking every day. And, although this is alarming, it makes sense. Because many more engines are overhauled than manufactured new, the number of components that are reused is large. Things like engine cases, cylinders, camshafts, and crankshafts are parts of the rotable pool that have a limited number of times they can be overhauled before being sent to the scrap yard. As the supply pool of rotables shrinks, the prices of these components will rise. This will send the cost of your future overhaul skyrocketing. This problem presents itself on many out of production, or low production number engines.
Although it is impossible to know the exact condition of the entire rotable pool for GA engines, Gemco has its own models that attempts to predict the current state of the market, and make logical conclusions based on the current number of engines out in the field right now. By not considering the impact of this obscure pricing factor, you could find yourself another $10,000 shy at your next overhaul using the $48,000 engine example. Ouch.
3. Labor - So you've compiled what you think will be what your engine will cost to overhaul. The majority of people we talk to, though, forget that you need to pay someone to take your old engine off, inspect, and put a new engine on. And, although probably not the most expensive part of your overhaul, you still need to account for it. Different shops charge different rates, and those rates change over time. In this department, cheap is not always good. There is no worse feeling than going to a shade-tree A&P, getting an overhaul done, and having the engine fail 35 hours later with that mechanic nowhere in sight.
Saving (And Paying) For Your Overhaul
We've reviewed some of the most important factors impacting the price of your future engine. And, lets assume that you've considered these items to modify your engine price to develop a realistic future price for your engine. Now, we need to develop a payment system that ensures we have enough saved up for overhaul. And before we even start, we have a problem: your engine overhaul is not a date set in stone.
Investment Elasticity and Maturity Dates
Your engine can fail at any time. Your engine is not programmed to understand what its TBO is, track its hours, and need overhaul right at TBO. Instead, manufacturers give us a TBO number based on their extensive database of engine testing to help owners better prepare for their overhaul. This "better prepare," however, is not a guarantee. So, when it comes to saving for TBO, you need the ability to be extremely flexible throughout the entire process.
This inability to predict the exact time of your next overhaul makes saving very difficult. Unlike retirement savings, where you can have a defined date that the benefits needs to be available, your engine overhaul is different.
Most financial advisors take advantage of financial product maturity dates and elasticity to make decisions as to the composition of an investment portfolio. For example, if you have a 6 year investment horizon, it may not make sense to invest in a bond that matures in 12 years, unless you or your advisor can justify the bond's ability to appreciate. Instead, it makes sense to purchase a bond with a 6 year maturity timeline. In this case, you do not need to worry about everyday price movement of the bond. Instead, you take advantage of the stable returns promised by the issuer. At maturity, you walk with the face value of the bond to meet your 6th-year obligation.
But because of your engine, you don't have any choice. You can invest in a portfolio of bonds that mature around the time of your next expected overhaul, but an earlier than expected overhaul may force you to sell these bonds on the open market, potentially destroying any returns you may have made because of a slump in the transitory market. Your other option would be to develop a portfolio of market securities, but those usually don't have a maturity date. When it comes time for your overhaul, you'll have to take whatever you can get for the security you purchased. We hope you don't need to overhaul your engine during a market recession, or worse off, a market depression. Many people around the globe learned this lesson the hard way during the recession in 2008. Stock-heavy portfolios of soon-to-be retirees plummeted, eradicating huge chunks of their personal savings.
This is why many financial advisors are ill-equipped to handle helping you plan for your overhaul. They don't fully understand that the time of your next overhaul could be 8 years from now, or tomorrow. There are no products that can ensure a reasonable rate of return, combined with protection from price elasticity. This leaves you with only one option: just leaving your money in a savings account, and that is not how you make your money work for you.
Except Gemco. As a Gemco customer, you always have access to your reserve account. You can benefit from making low, albeit stable returns on your investment account while being able to access the full amount of your funds to cover you in the event of a premature engine overhaul. We make your money work for you, while also always being available for you.
Despite all of this, let's assume you've developed your own investment plan that allows you to save up the appropriate amount of cash for your next overhaul while providing you with ample flexibility to be ready for a premature overhaul.
The next challenge you have is leveraging what will be a very small account to start with. Remember, you're probably only putting $15-$30 an hour away. So, for the first few months, you will not have much ability to actively invest your money. Broker transaction fees are constant no matter how much you want to invest. Although prices are dropping, the average transaction in financial markets will cost you $1 for every bond purchased, or $6 a trade. Those charges can quickly eat into any profit you hope to realize. Further, you will still need the capital to meet minimum investment requirements. Many mutual funds like to see at least a $2,500 investment to get started. That amount can take a while to accrue in your account.
Looks like you'll have to wait to start putting your money to work. Unless you're with Gemco. We can get your money working right away, and reduce transaction costs.
This article is dense. What seemed like a plain vanilla topic, engine overhaul savings, has turned into a devils snare that is filled with pitfalls, challenges, and rewards.
Don't try and navigate saving for your next overhaul on your own. Let Gemco's professionals help you develop a real plan that is tax-deductible, predictable, and flexible. As we tell many of our prospective customers, if you're not working with Gemco, you're more than likely groping around in the dark looking for the magic solution. By working with Gemco, you show that you're invested in your aircraft, and care about how you're going to handle future expenses.
These benefits, combined with other features of Gemco's Overhaul Savings program, such as tax-deductible payments, the ability to use credit cards with no credit card fee, and the ability to operate beyond TBO, make it one of the highest value programs available to piston engine aircraft owners.
Contact Gemco to learn about more advantages to our programs, and how we can custom tailor a program specific to your operation.